How Air India plans to cut fuel cost

In a bid to slash costs, Air India has hedged 10,000 barrels of jet fuel for its aircraft this month, four weeks after its Board gave a nod to the move.

"We have started fuel hedging and have hedged 10,000 barrels for delivery this month. We are closely following the Brent trading and plan to hedge at $110 a barrel," airline sources said on Wednesday.

Fuel hedging is a contractual tool large fuel-consuming companies like airlines use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract allows such a company to establish a fixed or capped cost through a commodity swap or option.

This was the first time hedging was undertaken by the national carrier in several years. In view of about Rs 100 crore being added to monthly expenses due to the volatile oil prices, Air India Board had last month cleared a proposal to enter into hedging of aviation turbine fuel (ATF) its airplanes lift overseas.

It was then decided that a maximum of 5,00,000 barrels of jet fuel, lifted abroad, would be hedged each quarter at a price of up to $110 per barrel.

A small committee was set up to take the process forward, with the airline identifying organisations like J P Morgan, Citibank and GDF Suez to carry out hedging, the sources said.

Maintaining that the jet fuel budget of Air India was close to Rs 9,000 crore for 2013-14, they said it amounted to 45 per cent of the total cost and almost 60 per cent of total revenue. The airline also pays about Rs 600 crore as sales and other taxes on ATF to state governments per year.

Asked as to why Air India was not interested in direct import of fuel which has been allowed by the government, the sources said it was not at all economical since the smallest package of jet fuel would be one tanker of 10,000 KL which would be much more than what is required each month.

A problem after a tanker was brought into a port like Chennai was of storage and transportation of the fuel imported, they said, adding that ATF got converted into kerosene if stored for a long period.

All such problems would not exist in case of hedging for fuel lifted abroad, the airline sources said. Airline officials have been upbeat over the induction of Boeing 787 Dreamliners, which were at least 15 per cent more fuel efficient than competing planes of similar size and range.

Global airlines' body International Air Transport Association had also helped Air India to implement the Fuel Efficiency Gap Analysis (FEGA) system which had led to saving of Rs 850 crore since it was introduced in September 2008, the officials said.

FEGA deals with economising on all aspects of an aircraft's operations, including its weight, power usage, washing of engines, the speed and cruising height.